Marc Rosen Quoted in Hedge Fund Law Report on Martoma Ruling, Changes in Law and Impact on S.E.C. Enforcement Actions

September 18, 2017

Kleinberg Kaplan Litigation chair Marc Rosen was quoted extensively by Hedge Fund Law Report concerning the industry-wide impact of the recent Martoma insider trading case ruling and the evolution of this body of law. The Second Circuit, in August, lowered the bar for the S.E.C. to pursue enforcement actions for insider trading violations by repudiating certain aspects of the decision in U.S. v. Newman, including the “meaningfully close personal relationship” criterion.
Mr. Rosen explains in the Sept. 14 article, “In U.S. v. Martoma, Second Circuit Eliminates ‘Meaningfully Close Personal Relationship’ Element Articulated in Newman for Insider Trading Prosecutions,” that the Martoma decision reflected yet another quick shift in the protracted history of insider trading jurisprudence, and that the changes largely have been favorable to regulators and unfavorable to defendants. “In just the last few years, the law has gone in New York from both requiring a meaningfully close personal relationship and a pecuniary benefit under Newman, to requiring neither under Martoma.”
“By focusing on the tipper’s purpose in disclosing material nonpublic information (MNPI), the Martoma standard is very subjective, unlike in Newman where the Second Circuit laid out a more concrete and objective test,” Rosen observed, adding that “given that the expectation of the tipper is material here, and the issue requires case-by-case determination, it is possible that factual disputes will arise about the nature and closeness of a personal relationship [between the tipper and the tippee],” and that “these controversies are unlikely to disappear from insider trading actions.”
Mr. Rosen was further quoted that Martoma gave the S.E.C. and the D.O.J. a new weapon in their arsenals that they may deploy when investigating and prosecuting hedge funds. “The Martoma decision has weakened the personal benefit requirement and made it easier for the S.E.C. to bring and win insider trading enforcement actions.”
Going forward in insider trading cases, he added, “the Government is going to argue that when a portfolio manager receives MNPI, the tipper acted with the expectation that the recipient would trade on it….But interestingly, the Martoma court made clear, repeatedly, that liability attaches only when the tipper both discloses information with the expectation that the tippee will trade on it and when the tipper acts with the intent to make a gift of trading profits.”
The silver lining of the Martoma decision for insider trading defendants, Mr. Rosen told HFLR, is that although the “meaningfully close personal relationship” standard that the Second Circuit articulated in Newman has now been eliminated, the requirement that a tippee knew, or should have known, that the tipper breached a duty by providing the information in return for a personal benefit is still good law and will continue to impact cases involving remote tippees.
Mr. Rosen further suggested that hedge funds must consider the question of whether, and to what extent, they should make use of expert networks as they go about their daily trading since Martoma and other rulings require hedge funds to be particularly careful in carrying out their business.
Mr. Rosen concluded that It is premature to make final assessments about Martoma’s long-term significance, pointing out that it is difficult to predict whether the decision will remain good law, especially with Judge Pooler’s forceful dissent. “Given that the Second Circuit does not frequently hear cases en banc, and that Martoma was written by the chief justice, the likelihood of en banc consideration is somewhat diminished.”
The full Hedge Fund Law Report article can be found here (login required).
The firm’s client alert on U.S. v. Martoma can be found here.